America’s mortgage deal

Unsettling

A deserved penalty or an opportunistic shakedown?

IT WAS billed as a landmark deal that exacted retribution on banks which wrongly turned millions of Americans out of their homes. Yet the announcement on February 9th of a huge mortgage-foreclosure settlement between five American lenders, the federal government and 49 state attorneys-general is most notable for the questions it leaves unanswered.

The deal, which may have been sealed but is apparently not yet signed, calls for $25 billion to come from five of the largest American financial institutions: JPMorgan Chase, Wells Fargo, Bank of America, Citigroup and Ally Financial. No justification has been given for this overall number nor for the amount each bank is to pay (which seems to reflect market share rather than any measure of culpability). It is not clear if the money will come in the form of cash or as write-downs on loans.

Where the money will go is also unclear. The federal government and the 49 states will get $5 billion, with $3.5 billion headed for a nebulous pot “to repay public funds lost as a result of servicer misconduct and to fund housing counsellors, legal aid, and other similar public programmes determined by the state attorneys-general.” Figure that out if you can.

Perhaps as many as 1m people will see the principal amounts on their loans reduced or will receive a reimbursement of a couple of thousand dollars. Here, too, it is uncertain whether they were really victims of maltreatment or merely faced the consequences of overborrowing. Oklahoma refused to take part in the national settlement: its attorney-general, Scott Pruitt, released a scathing statement saying the deal rewarded homeowners who stopped paying their mortgages over families who continued to pay, encouraging defaults.

Nor were any crimes or violations of the law revealed in the public announcements. At the core of the settlement are allegations that banks hired teams of low-paid clerks to start foreclosure proceedings. These employees supposedly neglected to follow due process or affixed the signature of managers to paperwork that, contrary to law, the managers never read. There were also allegations that banks illegally moved against soldiers serving abroad. But none of these claims was substantiated; indeed, the settlement did not even lay out specific allegations against the banks.

Lenders were careful to limit their post-settlement comments. That may be because they were grateful for avoiding the public airing of gross malfeasance. Or it may be because they felt that in the current regulatory and political environment they had little choice but to stump up.

In the aftermath of the settlement, shares of the four publicly traded institutions wobbled and slid (the fifth, Ally Financial, is still owned by America's taxpayers). Huge reserves have already been put aside for legal settlements in general and this one in particular, so no large earnings impact is expected but there are still big questions about the extent to which the case limits future liabilities.

The president and various attorneys-general have been insistent that the deal would not pre-empt future suits against the banks for related activities, but a statement from Wells Fargo noted that as part of the settlement it has been released from numerous categories of claims. It appears the line on litigation has been drawn finely enough for the government to say it has preserved the rights of any aggrieved bank clients to sue, and for the banks to say the deal ends a sordid legal chapter. Still, there are other areas to litigate and many different ways to extract money from the banks: in his budget proposal on February 13th, for example, Mr Obama imposed a tax on the largest financial institutions.

Perhaps the most beneficial bit of the deal is its impact on America's housing market. During the negotiations banks were reluctant to initiate foreclosures, a move that buttressed house prices by restricting supply but left a huge overhang of properties still to hit the market. The settlement lays out strict procedures for foreclosures, which should allow them to start again. That will be painful but will hasten the market's adjustment.